Target store, Block 37 sale bode well for Loop retail

(Crain's) — The Loop retail market didn't get better or worse last year, but the opening of Target Corp.'s State Street store and the sale of the Block 37 mall could bode well for the area in 2012 and beyond.

The retail vacancy rate for the Loop held steady at 13.6 percent for the second year, its lowest rate since 2002, according to a report by Stone Real Estate Corp., a Chicago-based retail brokerage.

The biggest story of 2011 was Target's decision to lease 124,000 square feet in the Sullivan Center at 1 S. State St., a deal that could cause more retailers to seriously consider a location in Loop. The Target store is expected to open in July but is included in the 2011 vacancy report.

“A street that was already very strong to begin with has gotten even stronger,” says John Vance, a Stone Real Estate vice president who authored the report.

“Retail has always wanted to be north of Madison,” he says. “Now that Target is going in there, it will bridge the gap between the north and south ends of the street. Tenants are now going to be more willing to look farther south because of the co-tenancy that Target provides.”

The Loop has become increasingly attractive to retailers since the opening of Millennium Park and the area's emergence as a residential neighborhood. Yet Mr. Vance says many retailers remain cautious about expanding amid an improving but still weak economy.

Two retailers that had stores in the Loop — Borders Group Inc. and Loehmann's Holdings Inc. — have disappeared altogether, leaving big spaces behind at the corner of Randolph and State streets. Walgreen Co. recently opened a drugstore in the 27,000-square-foot Loehmann's space at 151 N. State St., while the 31,282-square-foot Borders store across the street remains empty. Aside from Borders, all the street-level retail space along State Street is full, Mr. Vance says.

Yet the upper floors of the Block 37 mall remain awash in space, one reason the Loop vacancy rate is as high as it is. CIM Group, a Los Angeles-based real estate firm, has agreed to buy the 305,000-square-foot shopping center across from Macy's from Bank of America, which foreclosed on the property last year.

CIM Group is likely to have more success leasing the mall, which is about three quarters empty.

“Uncertainty is never good in real estate,” Mr. Vance says. “At the very least, stability of ownership will allow tenants to know they're making a deal with an owner, and not with a bank.”

“If they're able to get some type of retailer to take the third or fourth floor that makes it exciting and can drive traffic throughout Block 37, that could really improve their traffic,” he says.

The Stone survey covers retail space in an area bounded by the Chicago River, Lake Michigan, Congress Parkway and the Kennedy Expressway. The area's vacancy rate peaked at 18.2 percent in 2004, according to the report.

Other highlights of 2011 included the opening of a 55,000-square-foot Mariano's Fresh Market grocery store and a 13,000-square-foot III Forks Steakhouse at Lakeshore East. Competition for retail space is fierce among restaurants seeking access to heavy foot traffic from Millennium Park and from shoppers along areas such as the Magnificent Mile and State Street.

“There's a lot of people out there looking at the same deals,” says Chris Bisaillon, one of three partners at Chicago-based Bottleneck Management Group, which owns Sweetwater Tavern & Grille at 225 N. Michigan Ave. and plans to open another restaurant in the Tribune Tower. “Really, it's evened out from two or three years ago when the tenant had a lot of bargaining power. At that time there weren't many people who had the capital to expand, and the credit markets had dried up.”

Mr. Vance expects the Loop market to improve this year but says many retailers are waiting for the economy to strengthen.

“I'm really looking at 2013 or 2014 where retailers will want to open a store within six to nine months of seeing it,” he says. “Right now they're still cautious and they want to open in 12 to 15 months.”